Sitting on a Hummelstown rental and wondering if you can trade up without a big tax bill? If you own investment property near Hershey or across Central PA, a 1031 exchange can help you reposition your portfolio while deferring capital gains and depreciation recapture. You want clear rules, practical timelines and local know-how so you do not miss a deadline or run into zoning surprises. In this guide, you will learn the essentials, see scenarios that fit our market and get checklists you can use right away. Let’s dive in.
Why 1031 swaps fit Hummelstown
Hummelstown sits beside Hershey and close to the Harrisburg metro, with demand fueled by tourism, healthcare, education and state government. That mix supports a range of investment property types, from single-family rentals and small multi-family to mixed-use storefronts and professional office or flex.
If you are holding Hummelstown assets, a 1031 exchange can help you:
- Consolidate several small rentals into a larger multi-family building in Harrisburg for scale and simpler management.
- Rebalance risk and return by swapping lower-yield properties for higher cash flow, or the reverse.
- Pivot into mixed-use for diversified income, or evaluate short-term rental potential only after confirming local rules.
Before you plan your move, match your strategy to zoning, code and market realities so the replacement property performs as expected.
The 1031 rules that drive your timeline
A like-kind exchange under IRC Section 1031 lets you defer capital gains and depreciation recapture when you exchange real property held for investment or business for other like-kind real property held for similar use. Since 2018, only real property qualifies. Personal property does not.
A few non-negotiables guide every exchange:
- The 45-day identification period starts the day you transfer the relinquished property. You must identify potential replacements in writing to your Qualified Intermediary.
- The 180-day exchange period is the outer limit to receive the replacement property and complete the exchange. These are strict calendar days. Weekends and holidays count.
- You cannot touch the cash. A Qualified Intermediary holds proceeds between closings in a delayed exchange. You will report the exchange on IRS Form 8824.
- To fully defer taxes, buy equal or greater value and replace any debt paid off. If you reduce value or debt, the difference is taxable boot.
- Qualifying use matters. Property must be held for investment or business use. Quick flips or personal residences do not qualify without careful structure. Mixed-use and partial owner-occupancy require allocation and professional advice.
How to identify replacements
Your identification must be written, specific and delivered to your Qualified Intermediary by day 45. Use one of these IRS-approved approaches:
- Three-property rule: Identify up to three properties regardless of value.
- 200% rule: Identify any number of properties if the total value is not more than 200% of the relinquished property’s value.
- 95% rule: If you exceed the above, you must acquire at least 95% of the total value of all identified properties.
Keep copies of your identification notice and your QI’s confirmation. Missing the rules or the deadline typically disqualifies the exchange.
Local checks before you commit
Hummelstown and nearby municipalities have their own procedures that can affect feasibility, financing and cash flow. Complete these checks before you sign a replacement contract:
- Zoning and permitted uses: Confirm with the Hummelstown Borough or neighboring Derry Township that your planned commercial or mixed-use activity is allowed. Get clarity on change-of-use, certificates of occupancy and any special approvals.
- Short-term rental rules: Tourist demand near Hershey invites STR ideas, but many municipalities regulate registration, parking and safety. Do not underwrite projections without verifying the ordinance.
- Building codes and historic reviews: Older downtown assets may need code upgrades or historic district review, which can affect renovation budgets and timelines.
- Transfer taxes and recording fees: Confirm local and municipal realty transfer taxes and recording costs. These impact your net proceeds and closing planning.
- Dauphin County property taxes: Understand assessment practices and tax proration at closing so your cash-to-close and pro forma are accurate.
- Local data sources: Use county records for parcel and tax history, MLS for residential comps and LoopNet or CoStar for commercial and mixed-use comps. Consult local title companies and lenders on customary terms and timing.
Five exchange ideas you can use
Scenario A: Consolidate into Harrisburg apartments
Goal: Sell two or three Hummelstown single-family rentals and purchase a 12 to 20 unit Harrisburg apartment building for scale and streamlined management.
How it works:
- Close the sales of your Hummelstown rentals and send proceeds to your Qualified Intermediary.
- Identify your primary Harrisburg target, plus backups, within 45 days using the three-property rule.
- Close the replacement purchase within 180 days using QI-held funds.
Debt and boot:
- Replace at least the total debt you paid off. If your replacement loan is smaller, bring additional cash so you do not create taxable debt-reduction boot.
Lender tips:
- Begin underwriting early. Many commercial loans require 30 to 60 days or more. Coordinate payoff amounts, QI wiring, and commitment timing so you can close well before day 180.
Timeline example:
- Day 0: Close your sales. QI receives proceeds.
- By Day 45: Identify your replacement property in writing.
- Day 46 to 120: Complete underwriting and finalize loan terms.
- By Day 180: Close on the apartment building with exchange funds.
Scenario B: Downshift into a local mixed-use
Goal: Sell a larger, out-of-area multi-family and replace it with a Hummelstown mixed-use storefront plus apartments to gain hands-on control and stable neighborhood rents.
Key steps:
- Sell the out-of-area asset first. Identify up to three Hummelstown mixed-use options or use the 200% or 95% rules if identifying more.
- Underwrite NOI with current rent rolls, leases and tenant estoppels. Confirm the zoning supports the planned commercial tenants, such as restaurants or professional services.
Financing notes:
- Mixed-use usually requires commercial financing. Expect lenders to request leases, operating statements and a rent roll. If you plan any owner use, discuss loan products and tax implications early.
Scenario C: Secure the deal with a reverse exchange
Use case: A great Hummelstown mixed-use building hits the market before your relinquished property is ready to sell.
How it works:
- A specialized Qualified Intermediary arranges an Exchange Accommodation Titleholder to temporarily take title to the replacement property.
- You identify the property you will sell and complete that transfer within the required time windows.
Capital and complexity:
- Reverse exchanges often require more cash or bridge financing since the purchase happens first. Title is held by the EAT during the parking period, which your lender must accept. Work with experienced QI, tax counsel and lenders from the start.
Scenario D: Renovate with an improvement exchange
Use case: You want to buy a Hummelstown mixed-use asset and fund planned renovations with exchange dollars.
Structure:
- Exchange funds can pay for improvements during the 180-day period, but title is typically held by the QI or an EAT until the exchange completes.
- You will need clear contracts and budgets, plus tight coordination so the work and funding occur within the window.
Lender cautions:
- Some lenders do not allow construction draws while a QI or EAT holds title. You may need a bridge or construction loan and pre-approval of draw procedures.
Scenario E: Go passive with DSTs
Use case: You sold a Hummelstown rental and want passive income without day-to-day management. A Delaware Statutory Trust can be a qualifying replacement vehicle if structured to meet IRS guidance.
What to consider:
- DSTs are passive and typically purchased with cash. They can diversify your holdings but often have limited liquidity and specific eligibility requirements. Review the offering and consult tax counsel.
Financing and lender coordination
Your lender, QI and title team must operate on the same playbook. A few best practices will keep you on schedule and fully deferred:
- Engage your lender and QI early, ideally before you list or make an offer. Clarify payoff procedures and how exchange funds will move.
- Order payoff statements for existing loans and confirm your debt replacement target so you avoid debt-reduction boot.
- Begin your replacement loan application well before the 180-day deadline. Ask the lender for a commitment with a closing date that fits your exchange timeline.
- Ask your title company for assignment language, wiring instructions and closing statement formats that reflect the exchange and QI role.
- For reverse or improvement exchanges, confirm lender willingness to work with EAT structures and any interim capital you will need.
Step-by-step checklist
Pre-sale preparation:
- Engage a reputable Qualified Intermediary and review their procedures and fees.
- Speak with your CPA or tax attorney to confirm federal and Pennsylvania treatment for your situation.
- Order mortgage payoff statements and prep title documents for the relinquished property.
- Gather leases, rent rolls, operating statements and capital improvement records to support financing and underwriting.
Relinquished closing day:
- Confirm exchange documents are executed and assignments are in the escrow package.
- Make sure proceeds are wired to the QI, not to you.
- Start your 45-day identification clock and send written IDs per your QI’s rules.
Replacement acquisition:
- Keep your ID notices and QI confirmations.
- Track the 180-day deadline and schedule closing well ahead of it.
- Coordinate final loan documents and title requirements. Confirm your QI has funds ready for settlement.
After the exchange:
- File IRS Form 8824 with your federal tax return and keep a complete file of exchange documents.
- Work with your CPA to reconcile basis and updated depreciation schedules for the replacement property.
Common risks and how to mitigate
- Running out of time: Do not start late. Aim to close before day 180 and build in buffers for underwriting and title clearance.
- Mishandling proceeds: Never receive or control exchange cash. Funds must move through your QI.
- Identification errors: Follow your QI’s written format. Verbal or informal identifications are not valid.
- Debt and boot surprises: Model debt replacement early. If your new loan is smaller, plan to add cash.
- Local ordinance gaps: Verify zoning, short-term rental rules and any special permits before you rely on projected income.
- Inexperienced partners: Reverse and improvement exchanges need seasoned QIs, lenders and counsel.
Work with a local team that knows both sides
A successful 1031 exchange is part tax law and part execution. It takes precise timing, lender alignment and on-the-ground knowledge of Hummelstown, Hershey and the Harrisburg market. Hershey Real Estate Group pairs neighborhood-level insights with multi-asset experience across residential, mixed-use, commercial and hospitality. The team can help you source comps, coordinate valuation and underwriting, connect with exchange-experienced lenders and keep everyone aligned with your 45 and 180 day deadlines.
If you are considering a sale or replacement in the Hershey–Hummelstown corridor, reach out to discuss your goals, scenarios and timeline. Let’s build a plan that preserves tax deferral and upgrades your portfolio. Contact Hershey Real Estate Group to start your 1031 strategy.
FAQs
What is a 1031 exchange for Hummelstown investors?
- It is a federal tax deferral that lets you exchange investment or business real property for other like-kind real property, if you meet strict identification and timing rules.
How long do I have to identify and close on a replacement property?
- You have 45 calendar days after the sale to identify replacements in writing, and 180 calendar days to complete the purchase through your Qualified Intermediary.
What counts as like-kind property in Central PA?
- Any real property held for investment or business use can be exchanged for other investment or business real property, such as SFR rentals, multi-family, mixed-use, retail or office.
How do I avoid taxable boot when swapping properties?
- Buy equal or greater value and replace any debt paid off on the relinquished property with new debt or added cash on the replacement.
Can I move into part of a mixed-use replacement in Hummelstown?
- Owner use changes tax treatment and financing. Only the investment portion qualifies, so you should consult tax counsel and your lender before planning any personal occupancy.
Are short-term rentals near Hershey allowed in a 1031 strategy?
- They can be, but you must confirm municipal short-term rental rules first, including registration and safety requirements, before underwriting STR income.
What local due diligence should I do before buying a mixed-use building?
- Verify zoning and permitted uses, review leases and rent rolls, confirm code compliance and check transfer taxes and Dauphin County tax proration so your pro forma is accurate.
